In recent years, the Internal Revenue Service (“IRS”), as well as many state tax authorities, have offered to provide tax refunds by direct deposit service. This service has several advantages for taxpayers. Chief among those advantages is the speed with which the refund is received. Additionally, direct deposit provides enhanced convenience for the taxpayer, since the taxpayer does not need undertake the cumbersome process of receiving a paper check, taking the paper check to a bank or other financial institution, and depositing the check.
Moreover, for an unbanked taxpayer (i.e., a taxpayer who has no deposit account with any financial institution), direct deposit traditionally has not been an option. In an attempt to remedy this disparity, some tax preparers and financial institutions offer alternative products, such as refund advances. Typically, however, these products are accompanied by exorbitant fees and burdensome procedures. Moreover, many taxpayers would prefer to have a tax preparer's fee deducted from the refund proceeds, rather than paying this fee in advance. IRS regulations, however, prohibit direct deposits of a refund to any account not titled in the name of the taxpayer. Hence, even if the taxpayer had a bank account into which a refund could be deposited directly, there was no ability to segregate a portion of the funds into another account to satisfy preparer fees. To avoid this limitation, a taxpayer was forced to undertake even more burdensome procedures, such as giving the tax preparer power of attorney in order to allow the preparer's fee to be deducted from the refund proceeds.
Recently, the IRS has introduced a more flexible system, in which a taxpayer can designate multiple accounts (on IRS Form 8888) into which a tax refund should be deposited, and the amount that should be deposited into each account. It is anticipated that many state tax authorities will follow this practice as well. Conveniently, this would seem to provide an opportunity to allow a taxpayer to have the bulk of the refund paid into his or her personal account, with some fee paid (out of the refund amount) separately to the tax preparer's account. However, IRS regulations specify (and Form 8888 specifically states) that each of the accounts must be in the taxpayer's name. Hence, in order to take advantage of the new Form 8888 to pay a preparer's fee, a taxpayer would have to establish a separate account, in the taxpayer's name, for the preparer, and then provide the preparer with some form of power of attorney to access the account. This is no more desirable than prior arrangements.
Hence, there is a need for a facility to allow a taxpayer (and especially an unbanked taxpayer) to receive a tax refund in expeditious fashion. Further, it would be helpful if such a facility also allowed for tax preparer fees (and/or any other necessary fees) to be deducted in a convenient manner from the refund proceeds, to allow the taxpayer to avoid the dilemma of either having to pay for tax preparation service before receiving the refund or undertaking the burden and expense of obtaining a refund advance.